 In this section, I will be telling you about the concept of risk management. When we look at the finance, the theory of finance concentrates on three main pillars. The first one is dealing with the time value of money. Next we talk about the valuation of the financial assets and the third important aspect on which the entire theory of finance is based is the risk management. So the question arises, what is risk management? So before we try to understand the concept of risk, it is important to understand the concept of uncertainty. So both uncertainty and risk are used together. So uncertainty is a broader term. Uncertainty means that we are, we do not know, we are unaware of the things that are going to happen in the future. So that kind of a situation is called an uncertain situation. And whenever we are planning to make any sort of investments or we are trying to expand our business or we are setting up our business, we do not know that what is going to happen in the future, what will happen tomorrow, whether the demand for the product which we are going to produce through this particular business entity will increase in the future, it will become obsolete or what type of situation is going to be there, it is all subject to uncertainty. Now, there is another term which is called risk that is quite often used with the concept of uncertainty. When we use risk, it means that we are attaching the value of something with the uncertainty and then it becomes risk. So risk basically in financial terms can be defined as the difference between the actual return or the actual value and the expected value. So if suppose you have invested in a financial instrument and you think that by the end of the year, I will get 6% profit from this but actually your profit is 8% or 4% so the difference that will be considered as risk. So that is the difference between the actual value and the expected value. So when we are dealing with money, when we are dealing with investments, when we are dealing with finances, it is quite common that we are getting into situations that are subject to uncertainty and then when we attach value to it, when we try to understand something like profit or loss with the help of uncertainty, then we call it risk. So risk can be defined as the possibility of losing all or part of any original investment which you have incurred. If you have invested 1 lakh rupees, then that possibility or probability that you will not lose the entire investment or any part of it, whether it is the loss or loss, we call that particular element risk. So as I mentioned earlier, when we consider value in uncertainty, whether it is financial transactions or financial investments, when we add value in monetary terms, whether we are going to lose or gain profit due to uncertainty in the form of money, that particular thing is called risk. So that is the basic difference between uncertainty and risk. So it is important to understand that every risk situation is uncertain but every uncertain situation cannot be risky. And to explain this particular thing, I am going to take an example. Example is not from finance or financial economics but basically that will help you in understanding the difference between uncertainty and risk. So for example, we have arranged a dinner party in which we invited 100 people and you have arranged the food for 100 people. So if instead of 100 people, 110 people or 120 people or 150 people come, then there is uncertainty that more people can come. There is uncertainty that people can be less, that there is some protest going on on the way or the weather was not good or something like that. There was news that there was going to be a problem or there was going to be a traffic block. So in such a situation, the number of people you invited could not be as many as the number of people. So when you have arranged the dinner party, it is subject to uncertainty that people that actually turn up for the dinner, they may be less than the number of people who were invited and they may be more than the people who were invited. So this is the situation of uncertainty. I have told you that if you attach value to it, then it will become a risk. So we said that what will happen with this that whatever we had ordered or prepared, if people come, then the food will be wasted, our resources will be wasted in the form of food. If we have more than expected expectations, more uninvited guests, then you will have to spend some more money to manage the food immediately, to arrange it more. So there is a risk. So we can account for these two situations. But if you have kept a one dish party, then what will happen is that you have told everyone that whatever will come for dinner, they will bring their own food along with them and bring food for one or two people. In such a situation, we can see the uncertainty in the one dish party that it is possible that all the people who were invited to the one dish party did not come. But there will be no shortage of food or a surplus situation there. Because the people who did not come have brought their own food. So there is uncertainty in this situation. But there is no risk here that the expenses that you incurred and the plan that you planned to eat, those things are not wasted and there is no shortage. You have to arrange extra. So risk is always assessed in terms of the value of the expenses which you are going to make or the revenues or the return or whatever is in financial terms. Whereas uncertainty is any situation where you have a chance to assess the uncertainty or the uncertainty to assess that probability.